Covered Call Strategy Guide

The covered call is a foundational options strategy every investor should know. Here's how to implement it effectively.

Strategy Overview

Risk Profile:

  • Maximum Profit: Limited (premium + gain to strike)
  • Maximum Loss: Stock price - premium (if stock goes to $0)
  • Break-Even: Stock purchase price - premium received

    • Best Used When:

  • You own stock you want to keep
  • You expect flat to slightly bullish movement
  • You want to generate income

    • Strike Selection Strategies

    Conservative (Keep Shares)

  • Delta: 0.15-0.20
  • Strike: 8-12% above current price
  • Probability of keeping: 80-85%
  • Trade-off: Lower premium

    • Balanced

  • Delta: 0.25-0.30
  • Strike: 5-7% above current price
  • Probability of keeping: 70-75%
  • Trade-off: Moderate premium, moderate risk

    • Aggressive (Max Income)

  • Delta: 0.35-0.45
  • Strike: 2-4% above current price
  • Probability of keeping: 55-65%
  • Trade-off: High premium, higher assignment risk

    • Timing Considerations

    When to Sell

  • After stock has run up (capture gains + premium)
  • During high IV periods (more premium)
  • 30-45 days before expiration (optimal decay)

    • When NOT to Sell

  • Before earnings (unpredictable movement)
  • During very low IV (not worth the risk)
  • If you think stock will surge